Navigating lease terms in the face of large-scale economic uncertainty can be immensely challenging for both Northeast Ohio commercial landlords and tenants. During the COVID-19 pandemic, there have been many discussions about rent reductions, abatements, and evictions. Commercial tenants and landlords alike are concerned about declining income, and many are unsure how to move forward in a way that is beneficial to both parties.
A blend and extend lease amendment is one option that can help businesses navigate their immediate lease obligations and lower their costs in the short term, while staying on good terms with their landlord. Blend and extend agreements are considered a win-win solution, as they benefit both tenants and landlords.
What Is a Blend and Extend Lease Agreement?
In commercial leasing, a blend and extend amendment enables the tenant to extend their current lease term and blend their current rental rate with a newly negotiated rate. These agreements are most commonly used during periods of economic change and uncertainty.
How Does Blend and Extend Work?
Here is an example of how a blend and extend lease agreement works:
Imagine a commercial tenant has signed a five-year lease, and has one year remaining on their lease. They currently pay $25/psf per year for their 10,000 square foot facility, for a total of $250,000 per year.
However, due to increased commercial vacancies in the area, average rental rates have dropped to $20/psf. The tenant knows they’re overpaying for their current facility, and the landlord knows they’re at risk for losing their tenant and dealing with a vacant property.
In this scenario, the landlord may agree to extend the lease for an additional four years at the blended rate of $22.50/psf. There are several ways this could be accomplished: the landlord might accept the new rate of $22.50/psf for the next four years, or they might reduce the rate to $20/psf for the next two years, and then bring it back up to $25/psf for the last two years.
There are many different ways to structure a blend and extend lease amendment, but the end result is the same: the tenant lowers their costs by paying a reduced rental rate, and the landlord avoids losing their tenant during a time when commercial vacancies are high.
When Should You Consider a Blend and Extend Amendment?
From the tenant’s perspective, a blend and extend amendment may be a viable solution if:
- Average rental rates are lower than what they’re currently paying.
- They need to reduce their short term operating costs.
- They want to remain in their current facility.
- They have less than three years remaining on their current lease.
From the landlord’s perspective, a blend and extend amendment may be a viable solution if:
- Vacancy rates in their area have increased.
- They’re under pressure from lenders and partners to keep their property occupied.
- Multiple tenants leases may be expiring at the same time in the near future.
- Concessions demanded by a new tenant will be more costly than those demanded by their current tenant.
Blend and extend lease agreements can be mutually beneficial for commercial tenants and landlords, especially during times of economic uncertainty. Restructuring your commercial lease during the era of COVID-19 may be a smart move, but it’s important to approach this conversation with your landlord strategically.
These negotiations can be challenging and complex, and tenants who decide to go this route should partner with a qualified tenant rep who can guide them through each step of the process.
Interested in learning more about how a blend and extend lease amendment could reduce your short-term costs? Contact our team of commercial real estate brokers for more information.
To learn more about how CRESCO, Greater Cleveland’s leading commercial real estate company, can help you with your property needs, contact us at 216.520.1200, or fill out the form below. A CRESCO professional will contact you shortly.